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Rising U.S. oil flow changing market for Canada’s oil sands

Increasing shale oil production in U.S. will change, but won’t eliminate, U.S. demand for Canadian oil sands products, says a report.

While the U.S. is producing more oil, it still will need crude from Canada's oil sands, a report says. (SHUTTERSTOCK PHOTO ILLUSTRATION)

By John SpearsBusiness Reporter

Mon., Jan. 14, 2013

Surging oil production in the U.S. won’t eliminate demand for crude from Canada’s oil sands, says U.S.-based energy research firm IHS.

But it will change current patterns of demand, IHS says in a report released Monday.

Those changes highlight the importance of controversial pipeline projects for oil sands producers, the report says. One of the firm’s principals is author and energy analyst Daniel Yergin.

The report notes the rise in U.S. production from “tight oil” or shale oil formations, that until recently couldn’t be tapped. The flow is expected to jump to 4.8 million barrels a day by 2020, from the current output of 2.2 million barrels.

At the same time, production from Canada’s oil sands is expected to increase to 3.2 million barrels a day by 2020, up from 1.7 million barrels a day.

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“How much room is there in the North American oil market for the anticipated growth from the Canadian oil sands?” the report asks.

It’s a crucial question since, at the moment, all oil sands exports go to the U.S. A report last year by the International Energy Agency also pointed to the implications of growing U.S. oil independence.

Canada’s oil sand exports to the U.S. are confined largely to the Midwestern U.S. states, where a flood of shale oil and shortage of pipelines have created a supply glut and low oil prices.

Pipeline companies are seeking alternative outlets, but not without difficulty.

Enbridge’s proposed Gateway pipeline to carry oil sands crude through B.C. to the Pacific and on to Asian markets is not yet approved and has attracted fierce opposition.

TransCanada’s Gateway XL pipeline, which would open the way for more oil sands crude to flow to Gulf of Mexico refineries, has also encountered stiff opposition and is awaiting U.S. federal approval.

The report says there’s still room for Canadian oil sands crude in the U.S. market, as increased tight oil production is partially offset by declining conventional output.

Expanding access to the U.S. Gulf Coast refineries will be “critical” for the oil sands, IHS says. That’s partly because of its sheer size, which he says is equivalent to China’s entire market.

To expand access to the Gulf, he says, Canadian bitumen blends will have to displace imports from Mexico — whose heavy oil exports are expected to diminish — and Venezuela.

They’ll also need better access by pipeline or rail.

IHS notes that there’s some opportunity for oil sands product to move into Eastern Canada. Enbridge has applied for permission to move western oil eastward on its Line 9, which travels through southern Ontario — including Greater Toronto — to Montreal.

But “the greatest opportunity for oil sands is the Canadian West Coast,” the report says. Canada currently pipes 170,000 barrels a day of crude to refineries in Washington, but they’re at capacity, the report says.

Getting oil sands product to the West Coast would open up markets both in Asia and in California (assuming the state permits product from the oil sands to be sold under its environmental rules).

All in all, it concludes, “the United States will remain the primary market for oil sands (and the U.S. Gulf Coast a critical market for future oil sands growth) but the development of other markets is also a pressing concern.”

In the meantime, the report says, the ability to develop pipelines to carry the product to market will determine the development of both the oil sands and tight oil.

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